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Discuss the relationship between rationality of investors and the market efficiency. - Essay Example
Author : greenadrianna
Finance & Accounting
Pages 6 (1506 words)
Name: Tutor: Course: Date: University: The Relationship between Rationality of Investors and Market Efficiency Introduction The relationship between market efficiency and rationality of investors is a topic of intense debate among various academicians such as economists, financial professionals and investors…
33). In 1950’s, Simon set out to develop a fresh model to describe the resolution making processes. Simon postulates that well-meaning investors undertake rational choices under various constraints. These constraints create boundaries in which rational resolutions can be taken; these draw into question the postulations of rational selection in the utility curve (Livanas, 2004, p. 3). In 1960’s, Eugene Fama developed the Efficient Market Hypothesis; Fama argued that in an active market, which includes various intelligent and knowledgeable, securities will be aptly priced and replicate all available information (Fama, 1995, p. 2). This paper seeks to examine the relationship between market efficiency and rationality of investors based on these theories. Investment Decisions Researchers argue that investors make investment decisions under various constraints. These constraints can be exterior to the investor or arise from the predispositions intrinsic in the investor’s knowledge and reference point. ...